This past Tuesday, 500 Startups hosted its much-anticipated PreMoney conference in San Francisco, featuring panels and talks from some of the best and brightest in the venture capital industry. While topics were wide-ranging, a few stood out as running themes.
I've highlighted three subjects that I found particularly popular and interesting, including why firms need to be investing in diversity, disruptions coming for the VC industry, and what may happen in the wake of last year's arguably unreasonable activity.
Investing in diversity
First and foremost, investing in diverse people and geographies rang through almost every talk. We heard from David Cohen of Techstars, Mary Grove of Google for Entrepreneurs and Eric Osiakwan of Africa-focused VC firm Chanzo Capital, among others, all of whom stressed the importance of investing in diversity, not only when deciding who to invest in, but also where to invest.
According to Ericsson, 90% of the world’s population will have a mobile phone by the year 2020. And as the internet continues to spread around the world and penetrate untapped markets, there will be more opportunities for entrepreneurs to create companies servicing each market’s unique needs. The people best suited to understand those problems, and how to fix them, are locals—people who themselves experience them and feel the pain. The vast majority of growth in internet use, and therefore opportunity, is happening and will happen outside of the U.S., highlighting why investors need to make this a top priority, not just for social purposes but for financial gain, as well.
The fact that the internet is spreading, bringing innovation and value with it, isn't exactly a new idea. Firms have been investing heavily in some of the highest-growth geographies for some time now, namely China and India. The issue brought up more than once was that economic and technological growth that attracted firms to China and India are present elsewhere, too. Africa was brought up as an interesting new geography that doesn't get enough VC attention. Osiakwan of Chanzo Capital pointed out that the continent is experiencing a massive uptick in mobile internet adoption, and the way the population uses the mobile web is radically different than other markets.
Disrupting the disruptors
Although there weren't more than a couple panels devoted to changes on the horizon for VC, I found them to be especially interesting. Venture capitalists usually play the role of funding companies disrupting different industries, so it’s wonderfully meta that they are now seeing new innovations come to life to test their own wherewithal and adaptability. New services and laws have enabled a new breed of investors to take part in financing fledging companies.
One of the most disruptive things to happen to the industry in recent years is the rise of AngelList, a website that enables angel investors to connect and more easily invest together in startups. Founded in 2010 as literally a list of active angel investors, the site has grown into a major player in the early-stage investing game. AngelList's "Syndicates" feature, which enables angel investors to pool money and back other notable angels—who then invest that pool into their deal flow—has facilitated the raising of $164 million for 398 startups in the last 12 months alone. VCs would be wise to keep an eye on this service, as it will likely continue to have an increasing impact on the industry moving forward.
Another recent development that, I’d argue, hasn’t gotten enough coverage is the passing of Title III of the JOBS Act, which makes it legal for anyone to invest in a startup (previously only accredited investors were afforded this opportunity). With the new law, startups have been awarded an entirely new, and albeit unproven, funding channel. An often-heard complaint by founders is that it’s just too hard to raise money, especially outside of the Bay Area. Services that have been founded to take advantage of Title III—such as Republic, which plans to be the AngelList for non-accredited investors—have the potential to relieve at least part of that pain, shaking up the early-stage investment scene in the process.
It's worth mentioning that although this funding channel is promising, there's a fair amount of risk involved for investors. Since it’s all rather new, there has been little to no testing done on how to optimize the investing flow, operations of the sites, etc. That said, there's always a risk that comes along with being an early adopter of such services. Online commerce was offered as an example from Kendrick Nguyen, CEO of Republic; the early days of ecommerce logistics were a mess, and packages were often wrong or never showed up. Even though that was reality for a bit, people continued to use it because the benefit outweighed the risk. Some early movers in the crowdfunding space believe the same will be true of sites birthed from the passing of Title III.
How will the industry nurse the hangover from last year’s party?
Over the last six months or so, we’ve seen some rationality seep back into the industry after a hell of a party last year. Valuations have come down to reality and, "anecdataly," (anecdotes backed by some data, but not enough to represent a trend, h/t to Alex Wilhelm for the term) firms are being more cautious and taking longer to close deals, according to Aileen Lee of Cowboy Ventures. (Fun fact, she's the originator of the term "unicorn.")
So what’s to come moving forward? Have we seen the end of the unicorn trend? Well, yes and no. As valuations become more reasonable, almost by definition fewer unicorns will be minted—although the ridiculous number last year would have been hard to beat anyway. This isn’t to say that the future of innovation rooted in the internet is slowing, however. Investors are still bullish on opportunities in years to come, with industries such as agriculture and mining being seen as huge markets where the internet and software could play large roles in disruption. Lee even went so far as to say that in 10 years there will be more unicorns than there are today.
While the long-term view may be peachy for internet companies, what's to happen to the current crop that have recently raised rounds at valuations that they can’t support? As LP Chris Douvos has previously pointed out, there has been A TON of money fed into startups but nothing has come out the other end as returns to LPs. The public markets haven’t been very inviting (although Twilio did just receive a warm reception), so how are investors supposed to get liquidity?
The recent large M&A deals—such as Microsoft’s $26 billion purchase of LinkedIn and the sudden spurt of buyouts from Vista Equity Partners—had people talking and wondering if this channel is the next best thing to a lacking public market for liquidity. A handful of different luminaries have weighed in with their opinions, including Villi Iltchev of August Capital, Tomasz Tunguz at Redpoint Ventures, Scott Kupor of a16z and Marc Andreessen himself.
The vibe that I picked up on at PreMoney was that these huge deals are not indicative of a pattern, or hope, for a lot of the companies out there. What do these acquired companies have in common? They’re large and enterprise-focused. Deals like these add new tangible channels of revenue to the acquiring companies, which is not something that a smaller company would necessarily do. Lee opined that while larger enterprise deals may continue to get done, small and medium-sized companies may find it harder to get acquired, especially if they’re consumer facing. Another issue that VC-backed startups might run into when courting potential acquirers is a disconnect on multiples/price. Many of the larger corporations that could be buyers trade on more normalized multiples, as opposed to the arguably disjointed multiples many startups are used to receiving. All this to say, the coming months/quarters may prove to be a rude awakening for many of these companies.
There is no shortage of opinions in the VC world, and that fact makes it ever more important to be able to filter out and extract the quality knowledge nuggets. I’ve attempted to do this for you here, picking out what I thought was interesting and pertinent to today’s environment.
That said, this post isn't meant to be a comprehensive review of all topics talked about at the conference. 500 Startups does plan on releasing videos of all the talks on their YouTube channel in the coming weeks, so keep an eye out for that if you either want to form your own opinions, or would like to learn more about what inspired mine. I highly recommend Jason Calacanis's talk, Christine Tsai's interview of Aileen Lee, Josh Constine's interview of Aydin Senkut, as well as Jason Lemkin's presentation of his unique approach to early-stage SaaS investing.